Office Dépôt decision: the principle of non-deductibility of shareholder costs at the level of the subsidiaries of a group

The administration benefits from the rebuttable presumption of indirect transfer of profits abroad if it demonstrates the existence of a “relationship of dependency” between a French entity and a foreign entity and the accordance of unjustified advantages to the latter i) by increasing or reducing the selling or buying price ii) or by any other means. The second situation, close to the legal theory of abnormal act of management, concerns the questioning of the current transactions that are considered abnormal (royalties, commissions, interests, abandonment of debt, payment of fees, cautions, etc.). This second situation was examined by two decisions Office Dépôt Participation and Office Dépôt BS of December 13th 2017. (State Council, December 13th 2017, n°387969, Office Dépôt BS et n°387975, Office Dépôt Participations France)

In application of article 57 of the French Tax Code, the Administration had refused the deductibility of audit services costs billed by an American listed company to one of its French subsidiaries. As a result, the rectifications of VAT return and the withholding tax were applied to the French second-tier subsidiary, Office Dépôt BS (the 1st decision Office Dépôt BS), and the rectifications of corporate tax were applied to its French parent company, Office Dépôt Participations (the 2nd decision Office Dépôt Participations).

The Versailles Administrative Court of Appeal had confirmed the position of the Administration and of the Montreuil Administrative Court. It considered that the audit services costs rebilled by the American company to its French subsidiary were not incurred in the business interests of the French subsidiary and were not necessary to carry out its business. Indeed, on the one hand, these costs have been incurred by the parent entity that was the only entity obliged by the American law “Sarbanes-Oxley” because of its listing on the stock exchange of New York and, on the other hand, the results of the audit had no incidence on the activity of the French subsidiary.

After having characterized a “relationship of dependency” between two entities, it had concluded that the payment of these costs by the French subsidiary constituted the indirect transfer of profits under article 57 of the French Tax Code and the benefits considered distributed subject to withholding tax under article 109 and 119 of the same Code. The Administrative Court of Appeal had then decided that the French entity did not prove that the payment of these fees had a counterparty beneficial to its activity.

The State Council has confirmed the decision of the Court of Appeal in resuming the ruling that is very favorable to the Administration, already announced in its decisions Property Investment Holding (State Council, December 9th 2015, n°367897, Property Investment Holding France), Sodirep Textiles (State Council, November 9th 2015, n°370974, Sodirep Textiles SA-NV) and Vetter (State Council, June 8th 2005, n°255918, Vetter):

Article 57 establishes a presumption of indirect transfer of profits, if the administration demonstrates the existence of a relationship of dependency and the practice covered by its dispositions. The presumption of indirect transfer of profits can only be overthrown if the entity taxed in France proves that the accorded advantages are justified by a counterparty.

In this case, the State Council clarifies its reasoning as to the appreciation of the normality of costs rebilled by a foreign parent entity that have the appearance and the substance of shareholder costs.

Jean-Edouard Duvauchelle

Jean-Edouard Duvauchelle is a lawyer with the transfer pricing team. He joined Taj in 2015.